Function

• Debt settlement and bankruptcy function differently. With debt settlement, you negotiate with your creditors to allow you to repay less than what you owe. Typically debt settlement can only be useful if you're significantly behind on your bills and you owe primarily unsecured debt, such as credit cards or medical bills. With bankruptcy, you can wipe out certain debts completely through Chapter 7 or repay what you owe over time through Chapter 13.
  
  

Debt Settlement Process

• Debt settlement is a fairly straightforward process. To settle a debt, you can hire a debt settlement company or work with creditors directly. Typically, the process involves a period of negotiation in which you make an offer to your creditor for a percentage of what you owe. The creditor may accept or decline the offer. Once an offer is accepted, you may pay the creditor through a lump sum or in several large payments. Generally, you cannot begin to negotiate with your creditors until your account is at least 60 to 90 days past due.
  
  

Bankruptcy Process

• Bankruptcy is a legal process that begins when you file a voluntary petition with your local bankruptcy court. Once you file for bankruptcy protection, your creditors must cease all collection actions against you. You are required to complete courses in financial management and credit counseling prior to receiving a discharge. The Chapter 7 bankruptcy process typically takes approximately six months to complete. A Chapter 13 bankruptcy will take three or five years to complete, depending on the amount of your debt and your income.
  
  

Cost

• Debt settlement is designed to save you money by reducing what you owe. Depending on your creditors, you may be able to pay anywhere from 30 to 70 percent of your actual balance. If you choose to use a debt settlement company, you should be aware that these companies often charge an upfront fee as well as a monthly maintenance fee to negotiate for you.
  
  As of 2010, the filing fee for a Chapter 7 bankruptcy was $299. The fee for Chapter 13 was $274. If you choose to hire an attorney to file your petition, you can expect to pay hundreds or even thousands of dollars in legal fees.
  
  

Considerations

• Both debt settlement and bankruptcy are damaging to your credit, although the effects of bankruptcy tend to be more long-lasting. If you choose to use the services of a debt settlement company, you should be aware that there are a number of fraudulent companies in operation. Neither debt settlement nor bankruptcy can eliminate your liability for certain types of debts such as tax debts, student loans, child support or alimony.